'Ocean of oil' located in U.S. shale deposits

May 24, 2008|By JAMES H. WARNER

Nick Gavrilov, in a letter to the editor, questioned a statement that I made in an earlier article in The Herald-Mail. I said that we (the U.S.) are sitting on an ocean of oil. He asked where this ocean of oil is. That's a reasonable question. The answer is, this oil is located in various oil-shale formations inside the lower 48 states.

We have known about oil shale for more than 50 years. Until recently, however, it was unavailable for extraction at a reasonable cost per barrel.

The major oil companies have spent millions of dollars researching extraction techniques that would make it possible to exploit shale oil. For years, this research seemed futile.

However, extraction technology has been developed that permits shale oil to be pumped for $30 per barrel. To understand the potential of shale oil, there is more oil in shale, in the United States, than in all the other proven reserves in the world put together.

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To be exact, there are about 1.1 trillion barrels of proven reserves around the world. There are 2 trillion barrels in American shale, 1.5 trillion in the shale formations in Wyoming, Colorado and Utah. At current levels of usage, this is enough to supply all or our needs for the next 100 years.

To understand what it would mean, in terms of price, for this oil to be brought on line, one must understand the economics of oil. Economists classify petroleum as an "inelastic" good. A good is "inelastic" if for every 1 percent change in the supply, the price will change by more than 1 percent. In the case of oil, if the supply increases by 1 percent, the price should drop by about 3.7 percent.

This oil, which was formerly unavailable because the technology had not been developed, is now being made unavailable because congressional Democrats have imposed a moratorium on shale oil leases (70 percent of the shale is under federal land).

Instead of permitting oil companies to develop our own domestic oil resources, Democrats want to impose a "windfall profits" tax on oil. As we saw when this was done during the Carter administration, this will greatly reduce domestic oil production and increase the price of gasoline.

Of course, since about 50 percent of the shares in oil companies are held by pension funds and mutual funds, this tax will be paid by retired Americans and Americans who are saving for retirement.

James H. Warner is a retired attorney. He served as a domestic policy adviser to President Ronald Reagan from 1985 until 1989.